What is direct deposit and how does it work?

Whether you receive a salary, government benefits, or other types of funds on a regular basis, chances are you're being paid through direct deposit.

A direct deposit is a type of electronic payment that is automatically transferred directly into a payee’s account from a payer. Read on to learn about what it is, how it works, and some of the possible benefits.

How does direct deposit work?

Direct deposits are electronic, automated transactions that are approved by the payee ahead of time and fully managed by their bank or account provider. Most popularly done to receive payment from an employer, an employee would share their account information with their employer, who would then send payroll instructions to their own bank, which then passes the information on to an electronic network called the Automated Clearing House (ACH). ACH then directs payments to your account provider for processing.

Understanding some of the benefits

Direct deposit can have appealing, time-saving benefits for both employees and employers. If a payee has direct deposit set up, they will receive funds into their account automatically. This can help alleviate the stress of having to find time to physically go to a bank or stop at an ATM.

It can also eliminate the risk of payment getting lost or stolen in the mail, or getting delayed if a hold is placed on the funds after they're deposited.

Plus, with electronic payment, pay stubs can be digitally stored as well, saving the headache of having to find physical records later.

For employers, some benefits might include savings on payroll, printing, and mailing. The automated process can help ensure payments are made accurately and on time, which has the potential to lead to higher employee satisfaction. It's also considered a much safer process than mailing out checks, as the funds arrive directly into the payee’s accounts with no possibility of being intercepted. Knowing exactly when their accounts will be debited for payroll expenses may also help employers better manage their own finances.

How to set up direct deposit

Setting up direct deposit includes a series of steps and is often facilitated in an onboarding process when beginning work for an employer — though most employers allow for set up at any time during employment — or when selecting a payment method to receive funds.

Regardless of who the payer is, the process for a payee to set up direct deposit is generally the same. Here’s an example set of steps:

• Fill out a direct deposit form. Your employer or payer will ask you to complete and sign a direct deposit form. This includes personal details such as your name, address, and Social Security number. You’ll need to supply your account information as well, including your account number and routing information.
• Detail the deposit amount and/or distribution percentages. The amount of your deposit is typically equivalent to the amount of your paycheck after taxes. However, you may have the option of splitting it into different accounts, such as checking and savings — if splitting your direct deposit into different accounts, you can typically choose to split by a percentage amount (meaning you could deposit 30% into one account and 70% into another, for example) or by a set dollar amount.
• Attach a voided check or deposit slip. For accuracy, you may be required to attach a voided check or deposit slip to your form. This ensures no errors are made and that the payment is deposited into the right account.
• Submit your direct deposit form to your employer. Delivering sensitive personal and financial information in a secure way is important. An employee may choose to submit their direct deposit form in person or via a digital submission form if this is offered by their employer.

If using a method outside of an employer-run system, such as email, it is wise to double check that it is being handed off to the correct person at your employer — generally a payroll department or HR contact.